Can I Get a Home Equity Loan on My Parents’ House?

A home equity loan is accessible only to the legal owner of a property. This financial product is secured by the property itself, meaning the home serves as collateral. Individuals who do not possess legal title, such as a child seeking to borrow against a parent’s home, cannot obtain such a loan. The borrower must have the legal right to pledge the asset used as security.

Eligibility for Home Equity Loans

Lenders require that the individual applying for a home equity loan is explicitly listed on the property’s deed. This legal documentation confirms ownership and grants the borrower the authority to use the home as collateral. Without this verified legal ownership, a financial institution cannot place a lien on the property to secure the loan. This requirement protects the lender’s interest, ensuring they have a legal claim to the property if the borrower defaults on the loan obligations.

A home equity loan allows the lender to record a junior lien against the property, which is a legal claim secondary to the primary mortgage, if one exists. This lien provides the lender with recourse to the property’s value in the event of non-payment. Since a non-owner has no legal right to encumber the property with such a lien, they cannot satisfy this fundamental lending prerequisite. Therefore, a child cannot independently secure a home equity loan against their parents’ residence.

Accessing Home Equity as a Property Owner

Property owners have several options to access their home’s equity, such as through a home equity loan or a Home Equity Line of Credit (HELOC). Lenders evaluate various criteria for these products, including the homeowner’s credit score, which needs to be 670 or higher to qualify for favorable terms. The homeowner’s debt-to-income (DTI) ratio, representing monthly debt payments versus gross monthly income, is also a significant factor, with many lenders preferring it to be below 43% to 50%.

Lenders also assess the amount of available equity in the home, generally requiring that homeowners retain at least 15% to 20% equity after the new loan. The application process involves submitting documentation such as income verification through pay stubs or tax returns, bank statements, and details about existing mortgages. An appraisal is often conducted to determine the current market value of the property, which helps calculate the maximum loan amount.

Upon approval, funds from a home equity loan are usually disbursed as a single lump sum, while a HELOC provides a revolving line of credit that can be drawn upon as needed. Repayment terms vary, but homeowners make regular monthly payments that include both principal and interest. If the parents, as the legal owners, choose to obtain such funds, they would then have the discretion to gift or lend those funds to their child, separate from the home equity loan transaction itself.

Transferring Property Ownership

For an individual to obtain a home equity loan against a property, they must first become a legal owner. One method involves purchasing the home from the current owners, which would entail a formal real estate transaction, including a purchase agreement and transfer of title. Upon becoming the sole or primary owner, the individual could then apply for a home equity loan, contingent on meeting all standard lender qualifications.

Alternatively, the current owners could add the individual as a co-owner on the property’s deed. This process involves drafting and recording a new deed, which formally transfers a partial ownership interest. While this allows the individual to be recognized as a legal owner, such transfers carry significant legal, financial, and tax implications, including potential gift tax considerations, adjustments to property taxes, and future capital gains tax implications for all parties involved. These complex considerations warrant consultation with legal and financial professionals before proceeding with any ownership transfer.